Senate to debate tougher toy safety laws

Toymakers brace for another tough year, industry researchers say

By

MattAndrejczak

SAN FRANCISCO (MarketWatch) - The U.S. Senate, looking back on a year laced with tales of lead-tainted toys, is opening debate next week on tougher safety rules for toy makers, according to congressional aides.

In addition to slapping a ban on lead in all toys, the Senate legislation also seeks to require third-party testing certificates, put labels on toys to track recalled products, and jack up the cap on civil fines to $20 million, over 10 times the current $1.8 million cap.

In addition, it would boost the annual budget and staff for the Consumer Products Safety Commission, which regulates more than 15,000 consumer products, including toys.

The bill will be brought to the Senate floor for debate, said Steve Krupin, spokesman for Senator Harry Reid of Nevada, the Democratic leader who controls the legislative agenda.

The House passed similar legislation late in 2007. Lawmakers are trying to shore up the safety of toys after the alarming number of recalls last year that ensnared Mattel Inc.
MAT, +1.84%
RC2 Corp.
RCRC
and Spin Master.

This hurt industry sales, which slipped 2% to $22.1 billion, according to market researcher NPD Group. And complying with possible new laws come as toy companies face a number of headwinds, industry experts note.

The list includes increased manufacturing costs due to labor shortages in China, higher compliance and testing expenses to ensure safe toys, and tougher negotiations with Wal-Mart Stores Inc. Toys R Us, and Target Corp., who control about 55% of the U.S. toy retail market.

The cost of making toys in China will be at least 10% to 15% above 2007, predicts Lutz Muller, who runs Klosters Trading Corporation, a Vermont-based toy researcher.

Hasbro, the world's No. 2 toy maker, is pegging its toy manufacturing costs to rise 14% to 15%. Meanwhile, Mattel Inc., the world's No. 1 toy maker, plans to raise the price of toys it sells to retailers by 5% to 9% to counter rising testing and manufacturing costs.

While larger U.S. toy makers, such as Mattel, Hasbro Inc.
HAS, +0.85%
and Jakks Pacific Inc.
JAKK, -5.17%
should be able absorb higher manufacturing costs without too much damage to profit margins, others may not.

"This is where the crunch is coming," said Muller.

He said Wal-Mart
WMT, +0.30%
and Target
TGT, +0.07%
want to buy toys at lower prices this year as they cope with a slower retailing climate and keep inventories leaner. This, in addition to the higher costs for making toys, could be troubling for smaller toy makers, who may seek to be acquired, Muller added.

Wages are going up in China, particularly in Shenzhen, a hot bed for manufacturing toys and other consumer goods.

This has created a labor shortage, with manufacturers looking at sites further inland for lower-cost workers, said Baruch University Professor Prakash Sethi. Hasbro said some of its vendors have already set up shop in other parts of China to alleviate the cost pressures.

Sethi said companies are boosting incentives to keep workers. To lure factory hands who live in dormitories at plant sites, companies "are trying to improve the quality of life, offering better living quarters, better food, and teaching computer classes," he said.

Sethi has seen this first hand. He also runs the International Center for Corporate Accountability, which audits Mattel's factories in China to assess working conditions.

Industry taking its own steps

While Congress mulls new toy safety laws, the industry has been taking steps to shore up safety precautions.

Toys R Us is forcing its manufacturers to date code toys, test every single batch the run on factory lines, eliminate use of nickel-cadmium batteries and reduce lead in surface coatings of products. The rules go into effect March 1.

The big U.S. toy retailer also plans to send its independent testers into manufacturing plants to pluck products off the production line for testing, according to Chief Executive Jerry Storch. See full story.

Meanwhile, the Toy Industry Association is debating proposed standards to improve toy safety. The trade group last week put out for comment its proposal. See proposal.

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